If you are just getting into Forex, you will hear a lot of talk about “system” trading vs. “discretionary” trading. These Forex trading techniques are usually discussed as if they are completely distinct from one another, but in reality most trading methods rest somewhere in the middle. Which is better? That depends on you.
“System” trading, or “mechanical” trading, means trading based off of a mechanical system of rules. If trade criteria are met, you place the trade, and if they are not met, you do not. System trading is often used by traders who automate their trading since a computer can easily follow mechanical rules. Discretionary Forex trading obviously cannot be automated — unless you choose to have a computer search for setups and then alert you so you can make the final call on the trade.
Discretionary trading means using your judgment and intuition as part of the trading process. Does this mean you do not use a system when you trade with your discretion? Certainly not! Without some kind of method in place, you will not be trading with discretion: you will be gambling. Forex newbies often confuse the two. Trading without some kind of method is a quick way to blow your account.
Discretionary trading is not making random decisions, taking trades you do not feel confident about, or rejecting trades which look good because you feel nervous. Discretionary Forex trading does not replace discipline — indeed, you must have excellent self-discipline to pull it off, and it is a great way to develop it (in demo testing, preferably!).
What are the benefits of using discretion while trading? If you have to follow trade rules in order to avoid gambling, how can your discretion possibly help you trade well? It may seem contradictory at first, but there are many reasons discretion can be useful, most of them centering on context. A mechanical Forex system might alert you to a
Most Forex traders operate somewhere in between mechanical and discretionary trading. It seldom makes sense to remove yourself entirely from the equation, but it is gambling to place trades based solely on your intuition. You will eventually trade a Forex method with clearly defined entry and exit rules. The question is how you will trade that method. How much discretion you choose to involve with your trading will be determined by your personality as a trader and your own strengths and weaknesses. Only practice can help you to figure out the best approach to your own trading!
